Faculty of Economics and Business Administration Publications Database

Implied Volatility Duration: A Measure for the Timing of Uncertainty Resolution

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Authors:
Thimme, Julian
Weber, Jürgen
Source:
Month: 04
ISSN-Print: 0304-405X
Link External Source: Online Version
Year: 2021
Keywords: Preference for early resolution of uncertainty; implied volatility; cross-section of expected stock returns; asset pricing
Abstract:

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average about seven percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that `late' stocks can only have higher expected returns than `early' stocks if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.

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